Air Products and Chemicals Inc. faces a ratings downgrade if it borrows billions to take over a smaller rival, Standard & Poor's Ratings Service said Monday.
The industrial gas company's finances would be weakened significantly it completes an unsolicited offer to buy Airgas Inc. for $7 billion, including $5.1 billion for equity and $1.9 billion in assumed debt, S&P said.
"Based on our review of the preliminary information, we expect that a downgrade of Air Products could involve more than one notch, but is unlikely to jeopardize its investment-grade status," S&P analyst Liley Mehta said in a statement.
S&P rates Air Products at A for long-term debt, and A-1 for short-term corporate credit and senior unsecured debt.
Airgas is rated BBB for long-term corporate credit. S&P said that rating is on CreditWatch because of the possible transaction.
Air Products said Friday it would pay $60 per share for Airgas, and would make a hostile offer if necessary.
If the merger is completed, it would create one of the biggest industrial gas companies.
S&P said the potential damage to Air Products' finances might not be permanent. It said benefits from the proposed merger could help pay down the debt quickly.
"Its scale, product mix and geographic footprint would all be augmented, fortifying Air Products' already leading market positions," S&P said. It added that cost synergies could bring in "around $250 million by the end of year two."
Air Products has secured short-term credit that could be used to finance the Airgas deal until permanent financing is put in place.
The acquisition would mark a reversal for Air Products, which sold its U.S. packaged gases business to Airgas in 2002.
